Tesla CEO Elon Musk’s Next Big Disruption Isn’t a New Car, It’s a New Battery

Eric Tingwall

Oct 27, 2014

Sean Rice and the Manufacturer

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Elon Musk isn’t waiting for someone else to figure out how to build a better battery. While lithium-ion technology remains expensive and somewhat fraught with technical issues, the headstrong Tesla CEO has a plan that should at least make batteries cheaper. Many also think it’s his bid to establish the battery as the dominant alt-fuel technology.

Musk wants to cut the price of a Tesla battery pack by more than 30 percent by building a 10-million-square-foot Nevada factory that condenses the company’s current ocean-spanning supply chain onto a single property. His proposed “Gigafactory” would make batteries from start to finish, beginning with raw ma­teri­als and ending with battery-pack assembly.

Unlike Henry Ford’s revolutionary vertical integration in the 1900s, Musk won’t own the entire Gigafactory operation. Part of his plan is convincing established industrial giants to carry some of the $5 billion financial burden. Panasonic, which already supplies battery cells for the Model S, will make an initial investment of $200 million to $300 million to be the sole cell manufacturer on site. The Japanese electronics giant could chip in as much as $1 billion by the time the project is complete, while Tesla says it will put up $2 billion to $3 billion.

Sean Rice and the Manufacturer

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A rendering of Tesla’s proposed Gigafactory as seen from the vantage of a SpaceX rocket.

Barring a breakthrough in battery technology, the largest cost savings for Tesla will come from optimizing every aspect of the supply chain. Musk wants to go as far as importing steel and aluminum to stamp out cases for the battery packs. “It’s a lot faster, a lot less linkage, a lot less packaging, and inventory would be reduced,” says Bob Rauh, director of business development for automotive and infrastructure at Panasonic.

Today’s Model S batteries are manufactured in Japan before taking the long boat ride to California. Moving those processes stateside eliminates logistics expenses and Tesla’s exposure to Japan’s electricity rates, which are roughly twice those of the United States. Musk plans to drive his energy expenses even lower with an expansive solar array and wind turbines on-site. (Conveniently, Musk is also chairman of the SolarCity energy-systems enterprise.)

Even if there isn’t a wholesale shift in the technology, Tesla will do everything it can to squeeze pennies out of the battery cells, which account for 70 to 80 percent of the cost of the pack. Model S cells use Panasonic’s cylindrical 18650 format, basically an oversized AA battery and the most common lithium-ion battery type in the world. That decision allowed tiny Tesla to benefit from the economies of scale created by the largest consumer of lithium-ion batteries, the consumer-electronics industry.

Sean Rice and the Manufacturer

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Tesla Model S

Musk’s ambition—he claims the Gigafactory will supply battery packs for 500,000 cars per year by 2020—means Panasonic could be manufacturing billions of battery cells annually for Tesla. That kind of volume would allow Tesla to create its own economies of scale for a new battery shape rather than depend on the 18650. “The sheer size of the Gigafactory allows us to drive what is the most cost-effective size of the battery,” Rauh says.

Panasonic is studying new cylindrical-cell geometries that would optimize both the cost and the energy density for Tesla’s needs. Today’s Model S lithium-ion battery already uses a nickel-intensive cathode that is cheaper than the usual cobalt chemistry, but Tesla acknowledges that it is working with new cathode and anode materials for its next-generation battery, hoping to improve cost, density, and longevity.

As with other news about Tesla, the Gigafactory has created hype well ahead of the product. Analysts at Credit Suisse recently released a report suggesting Tesla could drop the cost of a powertrain from $16,500 to $7500, putting electric technology on par with the cost of a high-end internal-combustion engine. The fact that Credit Suisse’s predicted 55-percent improvement far exceeds Tesla’s own 30-percent claim didn’t stop media outlets from trumpeting this speculation as fact.

Many complex factors must align for the Gigafactory to come together and deliver the predicted cost savings. That said, Musk has shown real talent in talking others into giving his small company the things it needs to move forward, from the government’s first $465 million loan to Toyota’s bargain-priced Fremont, California, factory. The Gigafactory is slated to turn out its first battery packs in 2017—but don’t hold your breath. Every hero has his Kryptonite, and Musk’s has been sticking to a schedule.